During the financial crisis of 2008-09, many central banks expanded the monetary base. In some countries, the base remains high; in the United States, for instance it is roughly triple its pre-crisis level. Such an expansion, unprecedented in peacetime, has convinced many observers that a bout of high inflation will occur in the near future. That leads us to the lesson of the day:

To talk intelligently about the money supply, you must also consider the demand for money. Starting from a situation where supply and demand are in balance, the supply can triple, but if demand quadruples, money is tight. Similarly, the supply can fall in half, but if demand is only one-quarter its previous level, money is loose.

In normal times, it is a fairly safe assumption that demand is roughly constant or changing predictably, but in abnormal times, it is a dangerous assumption. No high inflation occurred in any country that expanded the monetary base rapidly during the financial crisis. Evidently, demand expanded along with supply. In fact, Scott Sumner and other “market monetarists” think supply did not keep up with demand. Similarly, nobody should be perplexed if a case arises where the monetary base is constant or even falling but inflation is rising sharply. Absent a natural disaster or some other nonmonetary event, it is evidence that demand for the monetary base is falling but supply is not keeping pace.

25 Responses to “Pay attention to demand, too”

As I've argued elsewhere, I think this type of argument may be correct, but so far if it has been made it has been made without looking at the details. An increase in demand for money is not the only reason that we experienced a fall in the price level (or a less acute rise in the price level -- depending on the period of time). It also has to do with the liquidation of loans; i.e. the destruction of money unrelated to the demand for it.

And, that the supply of high-powered money has increased but prices have not doesn't necessarily mean that the demand for money has risen at an equal pace in the sense that Sumner might mean it (in a sense that suggests that an even greater monetary expansion could solve the issue). It's not that banks are issuing money and people are holding it. It's that the banks themselves, for whatever reason, are sitting on money. It's particularly telling that the issue is not a fall in consumer spending (which has recovered) -- which would be characteristic of a society in which the demand for money has risen --, but the rate of loan issuance remains depressed (especially to businesses; maybe, because the current Recourse Rule doesn't favor these types of loans).

To me, this recent shift to emphasizing the importance of the demand for money has led economists away from the real problems which pervade the current economy. I don't think it's a demand side issue with regards to money. The problem is multi-causal and has to do with a lack of investment (and business loans).

The Market Monetarists are looking at NGDP and seeing that it is below trend they conclude that this is due to insufficient money supply to match the current hightened demand. They contend that the fed has, by design or by stupidity, responded to this NGDP shortfall against trend by tightening monetary policy when ,as the post suggests ,they should have been loosening.

Of course this sudden increase in demand for money did not come out of nowhere. It is likely that supply-side factors are indeed the root-cause and an injection of additional money will not magic those supply-side problems away.

However it seems to me that the way forward is both to address the fact that the fed has run a tight monetary policy in the face of increased demand for money while at the same time addressing the supply-side issues that prevent the economy from more effectively healing itself. Failure to address the demand-for-money side makes it harder to address the supply-of-goods side.

Such as the circumstances we find ourselves in now? Like I said, the evidence suggests that the problem is not with the demand for money. Consumer spending has recovered, which suggests that people are not holding onto greater quantities of money. Rather, we've seen depressed business activity, and a fall in business loans.

OK - if you don't see the problem as being demand for money then obviously you would not see increasing the supply as being the solutions. I don't think consumer spending proves your point though - that may have increased relative to 2008 levels and improved more than investment spending but it is still low compared to its long-term trend - and this is reflected in nearly every sector. This seems consistent to me with low AD and high demand for money.

I believe you are also saying that attempts by the fed to increase the money supply have failed - either the banks don't want to lend or no-one wants to borrow. This is consistent with a negative equilibrium interest rate and I share your concerns that in these circumstances even if we do have high demand for money that monetary policy in is in uncharted and risky territory (and its not clear to me what Free banks would do in this scenario).

The problem is that central banks have only very blunt tools for determining the demand for money. In free banking, redemption of bank notes, checks, and checking account balances would act as a signal and nothing more than the banks' profit motive would be required to respond to that signal by increasing the supply of money (substitutes) when demand for money balances increases.

"To talk intelligently about the money supply, you must also consider the demand for money."

Do you see no reason to pay attention to the assets of the bank that issued the money? If I were examining stocks, bonds, or any other financial security, then I would pay attention to the quantity of liabilities issued, and I would pay attention to the issuer's assets. What is true of ordinary financial securities is also true of money: An issuing bank with adequate assets can always use those assets to buy back its money, should its money start to lose value. An issuing bank with inadequate assets is unable to buy back its money, and as soon as money-holders realize this, they will either rush to redeem their money, or the money will lose value.

As a young person (even I was young once) I used to think that perhaps governments should give (and I mean openly "give" - not even sweetheart loans) freshly printed money (and I mean "printed" not created by book keeping tricks) to banks - so that their bank credit (in whatever form) was matched by notes and coins in their vaults. The 100% idea of the old (pre World War II) Chicago School. In return, of course, the banks would give up credit expansion tricks and just lend out (in future) a percentage (as high a percentage as they wanted to) of real savings - with people being told (in advance) that they did not "deposit" money in a bank, they entrusted money to bankers to LEND OUT (otherwise there could be no interest - indeed if people want banks to look after their money without lending it out they should pay the bankers for doing so, as they are really asking for a safe deposit service and money transport service, which costs).

"In this way" I thought as I walked to school (yes I was that pathetic - I thought about banking as a schoolboy) "credit bubble finance could be ended - WITHOUT a sudden massive deflationary collapse".

I know longer believe the above (partly because I do not trust bankers, or their defenders, to keep their side of the bargain - partly for other reasons). But this post has put me in mind of it.

For, of course, this is WHY the Federal Reserve tripled the monetary base (although the 300% increase may be more book keeping tricks than physical printing press work - I do not know, as the way the term "monetary base" is defined is no longer just notes and coins). The banks were in trouble (they still are) so the monetary base was vastly increased in order to prop them up, as most of this money (by various complex games) ends up in the banks.

But there has been no agreement from the bankers to stop playing games (because they believe that game playing is the only way they can get a large profit - and justify their own ultra high pay and perks). No one has even asked them to stop playing games (i.e. stop with the complex credit bubble schemes), indeed politicians (of almost all major political groups) DEMAND that bankers "start lending again" (and so on).

It is very depressing and "will end in tears".

By the way - I know that failing to prop up the banks would have had terrible economic consequences, and I also know that things like the 300% increase in the monetary base by the Federal Reserve were about the only way this propping up could have been done.

However, the consequences of propping up the banks (and other "financial institutions") will, in the end, prove to be even more terrible than the consequences of letting them go would have been.

And the end will not be long delayed.

The "long term" that Keynes laughed at is upon us. And the "moral" idea (so sneered at by Paul Krugman) that one can not have loans without real saving (i.e. without one Dollar's worth of REAL SACRIFICE, non consumption, for every Dollar loaned out) will prove to be true in the end.

Thrift, hard work and self denial (the denial of material consumption in the short term - in order to have greater resources in the longer term) will have their revenge on the absurd credit bubble schemes of the "clever".

By the way - nothing in the above (either in the, rather trusting, thoughts I had as schoolboy - or the cynical, and desparing, opinions I hold decades later) is hostile to free banking, in terms of honest money lending......

Let anyone be allowed to set up a bank, and take money from people (real savers) to be lent out.

Let this banker lend out 100% of these real savings (the cash people entrust to him - and his own "share capital") if he (or she) wishes to do so, and has been open and honest with the people who choose to invest their savings in this way. And I do not begrudge the money lender (the banker) high profits and a large income - if honestly earned.

But honest money lending (real free banking) should have nothing to do with lending out "money" that does not really exist (that no one has sacrificed consumption in order to save), treating debts, book keeping tricks, and even requests for the TRANSFER of money (such as cheques or drafts or....) as if they were money.

Still less of course (and here we can all agree) should such games be supported by Central Banks or other such (which should not exist).

For such support does not limit the size of credit bubble finance and prevent the "bust" of such credit money "booms" - it actually INCREASES the size of such problems.

Just as Alan Greenspan's actions over many years ("saving the world" i.e. saving the credit money bubble - each time it looks as if was about to collapse) did indeed put off the crash (the bust) - but made it bigger and bigger and bigger.....

B.B. actions (such as increasing the monetary base by some 300%) will have consequences that will be on a truly terrible scale.

Paul, I basically share your "monetary morality," but I think we run into problems when we try to impose our morality on other depositors (or bankers who cater to less-discriminating depositors).

So, in my view, the real problem isn't that the banking industry is dishonest (from our perspective), but that the legal system doesn't presently allow depositors like us to make demands for Treasury-Direct-only or Treasury-Direct-coin-only bank accounts, something we have every right to do under Justice Marshall's balancing test in McCulloch v. Maryland.

Only after the system allows the kind of bank accounts I just mentioned will we have any chance for a responsible, stable, free banking model (because neither the depositor or local bank is likely to be content with idle, albeit "inelastic," Treasury-Direct cash sitting around at the local bank).

Richard Schulmann what I am "wedded" to is that loans be from real savings - not from thin air.

I have no objection to "fractional reserve banking" in the sense of a bank even being alowed to lend out 100% of the money (notes and coins) entrusted to it (no reserve at all - not even 1%) - as long as the bank has told the people who entrust their savings to it that this is what it is going to do (and given them the choice). The form of "fractional reserve banking" that I object to is when a bank (either by book keeping tricks on its own - or via interaction with other banks) lends out 101% of the savings entrusted to it - or (more likely) 1000% of the savings entrusted to it (and on up).

However, all this is by-the-by.

The legal situation is complex (and Rick and others make various points about it - as do I, and we debate and so on).

But these days even when the bubble (the lending that is not from real savings) bursts (as it must - a fairy castle can not stay standing in midair, with only smoke and mirrors to support it) major banks are not allowed to close their doors.

Take the most moderate of men (people like George Selgin and L. White) - people horrified by nasty primitive cavemen like me (and, for the record, my neck is indeed red), they would agree that a BANKRUPT BANK MUST BE ALLOWED TO GO BANKRUPT - really bankrupt.

You, Richard Schulman, would also take this position.

However, the entire elite (every major enity, central bank, university and media outlet) in the world takes the opposite position.

To them "unlimited" amounts of money must be produced (from NOTHING) by Central Banks to prevent major banks (and national governments) to prevent major banks and national governments going bankrupt.

To talk of "depositing money" is bad enough - as the money is not really "deposited" it is lent out (so the use of the word "deposit" is a misuse of language). But to talk of "depositing a check".

A check/cheque is not money,it is a request to TRANSFER money - only when (and IF - after all the check/cheque may "bounce") the money (the notes and/or coins) is moved from the bank on which the check/cheque is drawn to the new bank, is it acceptable (even with the modern use of the word "deposit") to talk of any "deposit" being made.

All problems begin when non-coin moneys (more accurately, "money substitutes") are received by the bank and treated by the bank as being "deposits" (although I would add that money substitutes issued by a privately-owned, rent-seeking central banking corporation are subject to more abuse than those issued by the fully-public Treasury Department).

Furthermore, I think you're correct that a check, technically, is not even a money substitute, but a request or demand by the payor to transfer coined-money or money substitutes from the payor's bank to the payee's, and our inquiry into the effects of fractional reserve banking really can't begin until we agree on what is a "deposit" and when it is actually received by the payee's bank.

Money is an accounting device. It accounts for indirect exchange. I accept money from you for some good of mine, because you do not possess another good for which I would exchange my good but you do possess a unit of account that many others accept similarly.

A monetary token has value either because it is intrinsically valuable or because it signifies obligations that people in markets respect. In the overwhelming number of transactions these days, money has value for the latter reason. This latter sort of money is a contractual document (often electronic) rather than a commodity. It is a record. It is information. It is not intrinsically valuable. It has value in exchange only because it signifies the value of something else, even something in the future that doesn't yet exist and can only be anticipated.

The supply of this money has little to do with the supply of any single commodity, even if notes promise this commodity as a standard of value. The supply has to do with people's desire to exchange indirectly. If notes promise a standard commodity and the supply of this commodity changes without any corresponding change in people's desire to exchange indirectly, the money supply does not change. Demand for the commodity relative to its supply changes.

Expecting the money supply to change when the supply of a standard of value changes confuses money with the standard of value. The standard of value is not the money. I hesitate even to call it "base money", because this nomenclature only encourages confusion.

Dealing in "money" of the former sort differs little from barter. Much of the commerce we take for granted today is impossible with the former sort of money, so if we're confined only to the former sort, our economy simply collapses.

"A monetary token has value either because it is intrinsically valuable or because it signifies obligations that people in markets respect."

Martin, with regard to current U.S. money that is coined under the Coining Clause (regardless of metal type), the markets respect it, not primarily for its intrinsic value (though it does have some), but because: (1) the Constitution declares it to be our "base money;" (2) creating greater increments of coined money requires corresponding increments of human labor and so its quantity cannot be increased by simply adding zeros to paper; (3) because the Constitution is a respectable contract between its people and the government they created; (4) because markets respect and have confidence in the U.S. government's ability to assure uniformity of coinage and to effectively punish coin debasers/counterfeiters. (If the value of coined money was based primarily on intrinsic value we would not be talking about a monetary system, but a bartering system.)

With regard to U.S. substitute (paper and electronic) non-coin money issued under the Borrowing Clause and Legal Tender Cases, markets respect it not at all for its intrinsic value, but because of the U.S. government's ability to effectively punish evaders of the regulatory Helvering v. Davis "special income tax," which initiated Commerce-Clause-based currency regulation in 1937. There is no lasting "respect" for this kind of money without the government engendering fear and coercion in its users.

Rick the money does not arrive till it arrives (that may be a "trueism", but "trueisms", such as "A is A" or "I am myself" are still true - and acting as if they are not true leads to bad consequences) - not when the request for a transfer of money (the check/cheque) is put in the hands of someone.

"But that just puts security guards in the backs of cash transport vans at risk" (as money is moved from bank to bank at the end of the working day or at weekends or....) - to such a counter argument (should someone choose to make it).... As someone who was a security guard (and still deals with cash) I would love to believe that "treating a check as money - without need for money to be later transported to honor the cheque" was done for my benefit (so some some friend of Bill Ayers will not blow my head off - see 1981, when Comrade Barack was rather older than "nine years of age", his repeated claim being that the Weathermen gave up terrorism when he was nice years old, so it was O.K. for him to be friends with Mr and Mrs Ayers).

However, I rather doubt that the prime motivation of the big people in the credit bubble financial system is to save me from getting shot. They play games in order to create credit money bubbles in-the-hopes-of-profiting-from-the-bubble-and-getting-out-before-it-inevitablly-collapses.

Of course we in the West now have a fiat money system (the last major nation to go was Switzerland back in 1999 - when the gold link was quietly dropped when they adopted a P.C., Constitution - full of ..... about how "we celebrate our diversity" and other wonderful stuff).

However, the fact remains that the check/cheque is not the money - the fiat notes and coins are the money, the check/cheque is a promise to transfer money (and it can BOUNCE).

Fiat notes are not constitutional - indeed one of the big selling points of the Constitution was "no more not worth a Continental".

"Not worth a Continental" being a popular saying at the time - due to the fiat money inflation of the Continental Congress.

The new Constitution was (in part) sold as a way to get sound money.

SOUND MONEY IS NOT BASED ON POLITICAL POWER - that all the Founders knew. Just as Salmon P. Chase did (hence the First Greenback Case - before the corruption of the Second Greenback Case).

"But what about fiat COINS".

Good point.

Nowhere does the Constitution say that the Federal government must make its coins of gold or silver - although it does say that no State may make anything other than gold or silver coins legal tender. I would argue that it is IMPLIED (by talk of "weights and measures" and so on) but it is NOT clearly stated (and if a limit to government power is not CLEAR - then, de facto, it is useless).

This trusting attitude to the Federal government was a error - yes the Founders may have been inspired, but they were not Gods They could, and did, make mistakes - the worst being not going after slavery at once, and hard, rather than hopeing it would go over time. Even paying a fortune to slaveowners in "compensation" would have been vastly less expensive than what later happened - and the compensation need only have been in return for "children born after such a date will not be slaves" which would have been much cheaper than trying to pay for the instant liberation of all slaves in the 1780s.

Many nations (since coins have been invented - of course money is much older than coinage) have given in to the temptation to debase the coinage.

Both monarchies and Republics have done so - and the result has always been the same.

The coins fall in value.

Sorry - but even executing people who refuse to sell goods at such-and-such a price, does not stop this.

Debase the coinage - and the coins fall in value.

Of course they only fall in value by a limited extent (even a steel coin has some value) - whereas the fall in value (the inflation) of credit money can be, de facto, infinate.

Of course coins attract a "premium" - people (in quiet times) are prepared to accept that they are worth more than the mental they are made of (Carl Menger back in 1871 explained how one could start from just raw amounts of a commodity, then go to a coin made from that commodity, then......), but debasement still has an effect - just not an instant and total effect. And the effect of debasement of the coinage is never as dramatic as inflation of credit money (using bank ledgers) can be. It is not nearly so radical a thing.

That is why, although I oppose the base metal coin people, I think their system is vastly less damaging than the system we have in the modern world.

By the way it was not till the early 1960s that the American government stopped using much silver in the production of coins.

Future historians may find this date more important than either 1933 (when the United States went off the gold standard) or 1971 (when the United States government stopped lying about its courrency being linked to gold - as overseas governments, the only people who could still claim gold from the American government, were basically demanding that the United States government give them an ounce of real gold for every 35 Dollars of its inflated fiat money).

The old Chicago School (back before World War II) was cool with fiat money - but they were not cool with banks playing credit bubble games on top of the fiat money.

So even some DEFENDERS of a fiat money system are NOT cool with banks being allowed to pretend that loans (or checks/cheques) are "new money".

Or the (vile) idea that banks can "create savings".

Real savings must be (of course) a matter of SACRIFICE ("thrift, hardwork and self denial") with every Dollar of savings being a Dollar of SACRIFICE (hard earned money that a person chooses NOT to consume).

For every Dollar of loans there must be a Dollar of REAL SAVINGS.

I repeat - even some DEFENDERS of fiat money understood that (the old Chicago School - before World War II).

Making coins of steel (or whatever) does NOT alter this.

Want an investment of 100 Dollars?

Then someone has to choose NOT to consume 100 Dollars of their income.

Anything else is a scam.

There can be no SUSTAINABLE investment without SACRIFICE.

Otherwise - one is just playing a boom/bust game. Fine for some people (the big shots who are in at the ground floor, creating the credit bubble finance, and have plenty of time to get out before the whole scam comes crashing down), but not fine for everyone else. I am not an egalitarian - I have no problem with people being vastly richer than me (which is just as well - as I am as poor as dirt).

However, it can not be honestly denied that credit bubble finance (treating loans as "new money" and so on) is an engine for very radical concentration of wealth. Some people get very rich indeed (using the credit money to buy up real assets - before the value of the credit money falls), but the vast majority of people (eventually) get hit very badly.

"Nowhere does the Constitution say that the Federal government must make its coins of gold or silver - although it does say that no State may make anything other than gold or silver coins legal tender. I would argue that it is IMPLIED (by talk of "weights and measures" and so on) but it is NOT clearly stated (and if a limit to government power is not CLEAR - then, de facto, it is useless)."

Paul, I think it's clear that the federal government is not obligated to coin gold or silver under Article 1, Section 10, and also that it's not even implied, but understanding why is a major problem in libertarian circles, so I'd like to try to explain again.

As I said in a prior post, if all had gone according to plans under the original framers' document, slavery was supposed to begin a phase-out in 1808 (under Article 1, Section 9, Clause 1) and the temporary, federally-chartered, privately-owned, central bank (the First Bank of the U.S.) was supposed to end in 1811, with no plans for another federal central bank, and with all note-issue power reverting back to state-incorporated "free banks."

However, what actually seems to have happened is that slave importation INCREASED after 1787 (to take advantage of the 1808 deadline for the tax cap of $10 per slave) and thereafter slave trading gained such great momentum that it was impossible to stop without a civil war and a full federal takeover of the currency.

But, assuming 1808 was in fact the beginning of the end of slavery, we would have been left with:
(1) exclusive federal control of "base money" coinage under Article 1, Section 8, Clause 5;
(2) state governmental entities being absolutely prohibited from coining their own money or issuing their own paper money or "bills of credit" under Article 1, Section 10, Clause 1;
(3) state government entities ALLOWED to charter privately-owned state free-banks would could issue their own notes, but who would only use federal coin as base money; and
(4) state-chartered banks issuing their own notes as legal tender in common trade, but with state governmental entities being barred from collecting taxes or enforcing court judgments in "any thing but but gold and silver coin" (to give federal power over any private or foreign monetary influence that tried to inordinately control a state government with paper money).

As I've also stated before, this scenario is probably what George Selgin envisions, except that he would also allow the state-chartered banking corporations the power to issue their own base money coinage, in addition to allowing them to print their own paper notes. My view is that this is unacceptable under our Constitutional scheme of things because state-chartered private banking corporations were always supposed to use, exclusively, federal coin as base money for their notes.

Under the above, it should be fairly clear that the only way the Gold and Silver Clause would only become relevant again would be if Congress allowed state-chartered banks to issue their own notes, and if Congress believed the states could be relied upon to fairly (Constitutionally) govern the employer/employee relationship (formerly the slaveholder/slave relationship). Since I personally don't believe individual states can be trusted to fairly or adequately govern employers, the only hope I see for free banking is federally-chartered free banks, with power to issue their own paper and electronic notes, but with no power to issue their own base money coinage.

Getting back to my original point, this means that the Gold and Silver Clause will likely forever remain irrelevant and probably should be repealed to prevent continued conflict and misunderstanding. Of course, a proposal to get rid of the Gold and Silver Clause would cause the populace great concern and therefore should be thoroughly explained. (But this would mean thoroughly explaining U.S. monetary history, which would probably raise sensitive issues about regulatory income taxes on the use of non-coin money.)

Partly due to the divide between ending the slave trade (which everyone was agreed on) and ending SLAVERY. which the Founders wanted to do in theory, but most did nothing about in practice - Ben Franklin actively campaigned against slavery, and George Washington freed his own slaves (in his will - rather like Aristotle), but that is about it. Most of the rest were all talk and no action (on slavery - not on the slave trade).

Indeed in Britain (the mother country) paper money was unimportant (for most people) up till the First World War.

Most people got their weekly pay in a "pay packet" - and most people certainly did not see a "White Fiver" (a Five Pound note - signed by the man at the Bank of England) sitting in that pay packet.

It was much the same in the United States.

Buying small things (a loaf of bread....) could be done in token coins, more important buying and selling would be done with silver and gold coins (both Britain and the United States were still using large amounts of silver for coins as late as the 1960s).

Bank notes?

They were (mostly) for land speculators and other such.

Most ordinary people did not even have bank accounts.

Indeed Henry Ford insisting on paying his workers in cash even in World War II - after all (he believed) it was up to them if they wanted to put money in a bank or not.

As for the Founders view of Central Banking.....

Some Founders wanted no Central Bank - holding that it had been the main source of the transfer of money (via the excise taxes) from the poor to the rich (the holders of national debt) in Britain. Which it had been - in peacetime about half of British tax revenue went to pay interest in the national debt.

Others (such as Hamilton) did want a Central Bank - and an eternal national debt (which is what a Central Bank is REALLY FOR) to bind men of property to the government (his words - not mine). Not a national debt on anything like the present scale (Hamilton was not insane), but a national debt all the same. So that men of property would have to support the government (the existance of a national government) or lose their money. Cynical but sound reasoning.

Others (noteably John Adams) were prepared to accept a Central Bank - as long as it was so limited that it could not really do anything.

Neither side were happy with that idea.

In short we have to be careful with history.

For example, people talk of the Welfare State being similar to the bread and games of ancient Rome (and later their were indeed state teachers and state docters in Rome).

But it is not similar - as only a tiny percentage of the population of the Roman Empire lived in the city of Rome (and other large cities with welfare provision). The vast majority of people lived as farmers (and so on) and got nothing from the State.

So the Roman system could last for centuries - but the modern Welfare States certainly will NOT (indeed they are already starting to collapse).

And with banking.....

Some people (including me when I am in a bad mood - which is most of the time) curse the name of Walter Bagehot (third editor of the Economist magazine - the modern publication of is an enity I despise) for defending bank bailouts (AGAINST the arguments of the then Governor of the Bank of England).

But the bailouts that Bagehot supported (the "lender of last resort" scams) were tiny by modern standards. And the banks were vastly less important (in proportion to the general economy) as well - most people had no direct connection to the banking system. Sure they could be hurt by it (thrown out of work when a banking bubble bursting hit the economy), but they would get work again soon as the economy would recover fast.

It is all very different now.

The SCALE of the "finance economy" (like the scale of the Welfare State) is totally different to what has been seen before - even in proportion to the rest of the economy.

Things really have gone beyond the point of rational reform (which is something I sometimes suspect that George Selgin has not really grasped).

This system will collapse - period. And it will be very nasty indeed.

The big question is - will civil society survive such a collapse.

Or will people turn on each other - seeking "social justice" (like savage animals).

I just want to briefly reply to your comment about the collapse, which arguably has already begun.

As you know, I'm a big advocate of withdrawing monetary power from central bankers and transferring it back to Congress and the Treasury Department directly, either by way of a general legal demand for Treasury-Direct currencies at U.S. incorporated banks under McCulloch v. Maryland, or by way of a specific legal demand for Treasury-Direct coin-only accounts (for those who want to address the regulatory income tax issue).

In my view, the length and severity of the collapse will depend on two factors: the rate at which the public wakes up to the fact they must take positive legal action to disengage from the Federal Reserve system and the rate at which the Treasury Department wakes up to the fact they must freely and openly provide such Treasury-Direct accounts to the public through the existing banking system. (Sorry I couldn't be a bit more subtle, Kurt.)

In Argentinia General (President) Peron got rid of fractional reserve banking and he put money under political control.

Did this lead to good money?

No - it lead to hyper inflation.

For a very simple reason - he printed (litteraly printed - as well as Central Bank antics) lots and lots of money.

True Peron could not have created such a vast amount of inflation if he had been restricted to coining money (as opposed to printing it) - but, with the debasement of the coinage, he could still have created a lot of inflation. As many Roman Emperors (and other governments - including Republics, did).

The banks on their own can not create real inflation (vast increses in the real money supply) - they can "just" play credit bubble games. Creating terrible boom-bust events that may discredit a market economy (and lead to all sorts of statism) - but do NOT (on their own) lead to the destruction of the monetary order by vast inflation over time. The increase in bank credit over REAL savings is the "boom", but it inevitably leads to a "bust" (where the book keeping tricks of the banks fail) where the bank credit sinks back down towards the monetary base.

Only government (either directly or indirectly - via the power it gives to a Central Bank like the Federal Reserve, whether it is formally "private" or not its power still comes from the government) can create massive real increases in the money supply - true inflation.

Although, yes, governments may do this in order to save credit bubble bankers - for example the GERMAN government is basically being kept hostage by the fear that German banks will go bankrupt (it is being pushed towards a line of policy that it does not really want to follow).

"So what Paul - I know all this".

My point is that Congress may prove to be just as bad as the Federal Reserve.

If Ron Paul (for example) was in charge of the money supply - I think we can safely assume he would not go for a policy of inflation.

But what of many other people in Congress?

Still at least it would be clear who was to blame - and the people would get to "vote the bums out".

With the Federal Reserve in charge the people are essentially slaves.

For example, the Fed has increased the monetary base by some 300% since 2007.

Who are the people to vote for if they wish to stop this looting (this enslavement)?

Under the present system how the people vote does not matter.

And it is the same in Britain and in the Euro Zone and in......

The people have as little say in the West as they do in China - where the government has announced yet another orgy of money creation.

"My point is that Congress may prove to be just as bad as the Federal Reserve."

Paul, this would be true if not for the Coining Clause of Article 1, Section 8, Clause 5, which ultimately keeps the whole system honest, and from imploding, like for example, the Weimar republic, which gave its people no coining power.

However, if Congress began abusing its Treasury-Direct powers to the degree the Fed has been doing since 1965 (when its notes became irredeemable for coin), the people could take corrective action by demanding coin-only bank accounts.

As a point of interest, I was recently researching the Weimar Constitution to look for weaknesses in its monetary system. I doubt there could be a more vague and dangerous monetary power given to a government: "The Reich is responsible for legislation in the areas ... of trade, measurements, the distribution of paper money, construction and stock markets." Weimar Constitution (1919), Part 1, Chapter 1, Article 7, Line 14.

Contrast this with the U.S. Constitution and its rich Supreme Court tax and monetary history, and there is almost nothing to compare. For example, regarding the power of the U.S. judiciary to curb fiat money abuse: “Should Congress, in the execution of its powers, adopt measures which are prohibited by the constitution: or should Congress, under pretext of executing its powers, pass laws for the accomplishment of objects not entrusted to the government; it would become the painful duty of this tribunal, should a case requiring such a decision come before it, to say that such an act was not the law of the land.” McCulloch v. Maryland (1819)

Agreed - a government that was confined to "coining" money (not creating it either by either printing or by book keeping tricks) could never be as bad as the Weimar Republic. It could get as bad as third century Rome with base metal coins "washed with silver" (or, perhaps, not even washed), but the difficulty of physically coining money would limit the degree of inflation (i.e. the the degree of the inflation of the money supply).

As for banking, the degree of its corruption can be physically measured.

In 1879 at the end of Grant's "gilded age" (when the Dollar was about to put on the gold standard) there were two Dollars in bank "deposits" for every one Dollar that actually existed. And people thought the degree of corruption (of the "money power" concentrating wealth, because of course credit money is used to buy real assets before the "bust" comes) was terrible - unacceptable.

By 1929 (largely thanks to the antics of the Federal Reserve from 1913 - and the false sense of security it gave to banks) there were 12 Dollars in bank "deposits" for every Dollar that actually existed. A credit money bubble of truly vast size and scope.

Today it is about the same - especially if one remembers that a lot of what the government pretends is the "monetary base" is not even notes and coins (not even the token, fiat, notes and coins that pass for money today). How much of that 300% increase in the "monetary base" that B.B. (if only that stood for "Bilbo Baggins") has pushed out from the Fed since 2007 is actually Dollar notes and coins (and how much just book keeping tricks) I just do not know.

Banks (in Europe as well as the United States) are even allowed (indeed ENCOURAGED) to count government debt paper as part of their "reserves".